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Greetings, and welcome to Endeavour Mining's First Quarter 2020 Webcast. [Operator Instructions] As a reminder, this conference is being recorded.It is now my pleasure to introduce your host, Mr. Sébastien de Montessus, CEO of Endeavour Mining Corporation. Thank you, Mr. de Montessus. You may begin.
Thank you, operator. Good morning, good afternoon, everyone, and thank you for joining our Q1 operational and financial results presentation. My name is Sébastien de Montessus, I'm the CEO of Endeavour Mining, and it's a pleasure to be talking to you all once again. Before we start, I'd like to ask you all to please note today's call is covered by our disclaimer and notice on forward-looking statements. The format for today's call will follow our usual format for quarterly results. I will provide an overview of the results. Our CFO, Louis Irvine, will then review our financial performance, followed by Mark Morcombe, who will discuss the operations, and I will conclude before opening the Q&A. Our Head of Exploration, Patrick, is also with us here today and available to answer any exploration questions you may have. Before we dive into our results, I just wanted to briefly touch on our response to the coronavirus pandemic. I'm pleased to say that all our operations are currently running at near-normal levels. And we are still shipping gold, albeit with increased health and safety measures to keep our workers safe and prevent the spread of the measures to keep -- and spread of the virus. Back in March, we did have a few employees who were tested positive for COVID-19, and I'm pleased to say they have all fully recovered. Since then, we have not had any reported cases to date. Across West Africa, governments were quick to implement strong measures to minimize the spread of the virus by leveraging their experience from the Ebola crisis. So far, these countries have all successfully contained the spread of COVID-19 with their proactive responses. However, we continue to remain extremely vigilant. Our response to COVID-19 is being managed by a designated team who are supported by a well-regarded epidemiologist and an 11-person medical team from a leading U.S. NGO who will be deployed as and when the need arises throughout the countries where we operate. Here on Slide 7, you can see a snapshot of the epidemiological surveillance system we've developed with our team to live-track cases at each of our operations and across the 3 countries where we operate. This is helping us to design the mitigation and business continuity efforts for the group, while also, ensuring with best support our communities and the national authorities. Our primary focus throughout this crisis has been the protection of employees, contractors and local communities. We are also making sure that we contribute meaningfully to the national and local efforts in our host countries, helping to supply key medical equipment and training dozens of local health workers. On top of this, we have committed so far $6 million to support local and national efforts, including salary donations from our leadership team. Turning now to Slide 9. I will briefly touch upon our business continuity plans. Alongside our health and safety measures, we have reviewed and stress-tested different business operations, supply chain and shipping scenarios based on various escalations of proactive measures. This range from normal course of business to care and maintenance, and you can see the details of those here on this slide. We currently are operating in a Level 1 environment with enhanced preventive measures to ensure that we can continue to ship and sell gold despite the closure of borders. Alongside our focus on the commercial aspects, we have also reviewed our site roster systems to ensure we had key people on site before borders to have closed. This has worked well, and we are very grateful to them in helping to keep our operations running.I must say that it's a time like this, during a crisis, that you find out about your own team, and I've been really impressed by them. I'm proud of the speed and dedication that all of our people have shown in their response to this crisis, and I thank them for it. To my employees and staff listening to this call, in addition to dealing with the COVID outbreak, we now also need to make fatigue management a priority as I know that some of you are now into your second straight roster, and we will reiterate this on our internal quarterly results call later today. As just described, we have weathered the COVID-19 crisis well so far, and I'm pleased to see our strategies and precautionary measures have worked. However, whilst we are seeing the lockdown being lifted across a number of European countries, we need to remain cautious and vigilant in West Africa.Turning now to our performance this quarter. I'm pleased to report that our Q1 results are consistent with our 2020 guidance and that we have achieved a record operating cash flow this quarter. Looking at our group LTI frequency rate, it remains well below the industry average at 0.26 for the last 12 months. Group production for Q1 stands at 172,000 ounces, placing us on track to meet our 680,000 to 740,000 ounce guidance. And the same is true of our group all-in sustaining cost level, standing at $899 per ounce this quarter, which we expect to see decrease in the second half of the year into our guidance range as we will begin to benefit from the high-grade Kari Pump deposit at Houndé. Moving to Slide 11 and our safety record. Unfortunately, our company experienced 2 LTIs during Q1. As I mentioned on our last call for our 2019 year-end results, we regrettably had a fatality at our Karma mine back in February. Since then, we've done a full assessment of the accident to make sure this doesn't happen again. And I will let Mark run you through this later in the presentation. Safety has and always will be the most important factor for us, and we will continue to be vigilant in identifying root causes of LTIs and further increasing the safety of our operations. As I mentioned earlier, we need to be careful with the team management. We must keep placing health and safety first, while doing our best to operate in this challenging environment. Ensuring our employees go home safely every day is the most important goal we have. Endeavour saw another strong quarter in terms of production, which increased by 54% this quarter over Q1 '19, driven by the startup of the Ity CIL operation. All-in sustaining cost increased by 3% to $899 per ounce, driven by the scheduled higher cost at both Houndé and Agbaou and higher royalties, which were partially offset with lower costs from the Ity CIL operations startup in Karma, in addition to lower corporate costs. Despite operating under the COVID-19 environment, Q1 production decreased by only 3% cover over Q4 '19 due to slight increases at Houndé, Ity and Karma. All-in sustaining cost increased by $80 an ounce in Q1 compared to Q4 '19 due to higher royalties and the guided higher cost at Houndé, Agbaou and Karma, as we have previously disclosed. As you can see on this next slide, we've generated over $100 million per quarter of all-in sustaining margin over the last 9 months. This is a substantial increase compared to Q1 last year, thanks to a stronger gold price and Ity CIL production ramping up. Our margin improved over Q4 last year due to the benefit of the higher gold price, which offset our expected higher costs due to CapEx being H1-weighted. Moving to Slide 14. As you can see, we reached a record level of operating cash flow. It is particularly pleasing to see this increasing curve, and I will let Louis walk you through the underlying details in the finance section. Looking closer at our free cash flow generation before debt servicing on Slide 15, you can see here that Q3 of last year was the inflection point for us after finishing construction at Ity. We are proud to have generated $187 million since this inflection point, with $55 million net cash generated in Q1. This is particularly compelling for us as the second half of the year is expected to be significantly stronger due to our expected higher production at lower all-in sustaining cost. In addition, we will also benefit from our -- from the end of our hedging program at the end of June. Moving on to Slide 16. As a result of this sustained period of cash flow generation, we've reduced our net debt by nearly $190 million over the past 3 quarters. Overall, we have decreased from a peak net debt of $660 million at the end of the second quarter of last year to $473 million, which resulted in a significant improvement in our net debt-to-EBITDA ratio to just above 1x. It's worth bearing in mind that we have decreased this ratio from a peak of almost 3x just 12 months ago. This quick deleveraging will, of course, allow us to accelerate our shareholder return strategy, which we are looking forward to formalizing later this year.And now I'd like to hand over to Louis to take you through the financials in greater detail. Over to you, Louis.
Thanks very much, Sébastien, and hello to everyone. As Sébastien said, this has been a good quarter. And looking at Slide 18, you can see that we have enjoyed a record quarter in terms of revenues, adjusted EBITDA as well as operating cash flow. The increase in revenues against relatively stable operating costs meant that our adjusted EBITDA increased by 32% over the past quarter to $130 million. That's also an increase of 217% from the same quarter last year. Meanwhile, our operating cash flow before working capital increased by 46 -- 146% from quarter 1 2019 to $119 million. Over the next few slides, I'll walk you through the details behind these numbers.Let's turn now to Slide 19, where we have provided a breakdown of the major elements used to derive our all-in margin. We have highlighted here some key elements, and I'd like to take you through them now, starting with revenue. As I noted earlier, revenue increased as a result of more gold sold by the company and the higher realized gold price. Cash cost of sales increased on a nominal basis due to higher production compared to quarter 1 2019. On a dollars per ounce basis, it was $661 an ounce in quarter 1 2020, up $24 per ounce and down $2 per ounce compared to quarter 4 and quarter 1 of 2019, respectively. The increase over quarter 4 was mainly driven by higher costs at both Houndé and Agbaou, which was slightly offset by lower costs at Karma. Royalties increased over quarter 4 due to higher realized gold price and an increase in government royalty rates based on different sliding scales, details of which have been provided in the news release and the MD&A. Looking at our sustaining capital spend, the increase is mainly due to increased waste capitalization at Houndé. As you may have noticed in our guidance, capital spend for this year is more heavily weighted to the first half. Non-sustaining capital spend decreased slightly over quarter 4 due to decreases at both Karma and Houndé, which was slightly offset by an increase at Ity, mainly related to our TSF raise. The non-sustaining exploration capital spend for quarter 1 2020 increased over quarter 4 of last year due to exploration drilling mainly being carried out during the first half of the year to take advantage of the dry season. We can see that it was up slightly over quarter 1 2019, which Patrick will comment on later. In summary, these changes resulted in a decrease of the all-in margin by $5 million over quarter 4 2019, and an increase of $58 million compared to quarter 1 2019. On the next slide, we start from the all-in margin as shown on the previous slide and work our way to the net cash inflow for the group. Starting with working capital, a further reduction of $9 million was recorded in working capital levels compared to quarter 4 of 2019, most notably a reduction in inventories of $11 million during the quarter. More detail is provided in the table at the top line of this slide.Taxes paid increased compared to quarter 1 2019, mainly due to provisional tax paid at the Houndé mine, while they significantly decreased over quarter 4 due to the scheduling of payments. The interest paid increased compared to quarter 1 2019, mainly due to interest payment on equipment leases at Ity. The increase over quarter 4 meanwhile is due to the timing of convertible bond coupon payments. Moving to our M&A line item for quarter 1 2020. This includes the consideration for the increased 5% Ity ownership and -- we obtained during the first quarter, and advisory fees related to the proposed SEMAFO transaction and previous engagement with the Board of sentiment. Finally, in terms of proceeds of long-term debt, $120 million was drawn on the revolving credit facility as part of our COVID-19 business continuity program. This was a precaution to ensure that Endeavour would have substantial liquidity and financial flexibility to operate under various stress test scenarios. Moving to Slide 21. We can see the increase in cash flow before working capital per share since quarter 1 2019, and our cash flow per share recorded at the end of the fourth quarter of $1.14. The slide highlights the steady increase that we've seen over the last 5 quarters, an increase of $0.93 since quarter 1 2019. Turning to Slide 22. Here, we have highlighted the significant improvement of our financial position through the lens of our reduced net debt and reduced net debt-to-EBITDA metrics, as Sébastien touched on earlier. Net debt amounted to $473 million at the end of the first quarter, a decrease of $187 million since reaching a peak net debt of $660 million during quarter 2 of 2019. Similarly, the net debt to adjusted EBITDA ratio significantly improved over the quarter, decreasing from 1.48x at the end of 2019 to 1.06x at the end of the first quarter based on the trailing 12-month adjusted EBITDA. This marks a large improvement from the corresponding period last year, where the ratio stood at 2.96x. As I noted earlier, as part of our COVID-19 business continuity program, we drew down the entirety of our available revolving credit facility, increasing our cash reserves to $357 million at the end of the quarter. Slide 23 details our net earnings and adjusted earnings per share of $0.30 for quarter 1 2020. Underlying earnings were also positive at $0.24 per share. The main takeaway here is that this was a much cleaner quarter than in prior quarters with relatively few adjustments relating to nonrecurring costs in order to arrive at the adjusted earnings number. Finally, moving on to Slide 24, you can see how our [ quarterly ] adjusted earnings have trended since the start of 2019, when we finish construction at Ity. Compared with quarter 1 2019, we have seen an increase of $0.35 per share. And that's it for me. I'll be happy to answer any questions at the end. And I will now hand over to Mark to give us an update on each of the mines and the projects.
Thanks, Louis, and hello to everyone on the call. I hope that you're all doing well in whatever level of confinement you are currently enjoying. Before we dive into the quarterly performance, I'd just like to reflect on the fatality that occurred at Karma in late February, which involved the loss of control of the [ craner ], when its engine failed near the top of the [ candle of peeper end ]. We conducted an internal and external investigation into this fatality and have adopted many actions at Karma and across the group to prevent reoccurrence. These lessons applied to the way we conduct and sign off maintenance-related checks, how we undertake operational checks on emergency steering and parking assistance, along with a number of other actions. Importantly, these lessons apply not just to heavy mining equipment, but to light vehicles, cranes and contractor fleet. Since the fatality, the team at Karma have responded really well in terms of renewed focus on operational safety and performance.To kick off the operations overview, the production bridge on Slide 26 highlights the variances between quarter 1 2020 and the corresponding period last year. The completion of the CIL project has had by far the greatest impact on our results over the last 12 months, with the first gold pour at Ity taking place at the end of Q1 2019. We are happy with our Q1 performance. As a group it's tracking in line with guidance, and I'm extremely proud of how the team is working together in the COVID-19 environment. I would like to echo Sébastien in thanking our teams for their hard work and dedication through this time. As already mentioned, during the first quarter, we operated at near-normal levels, and we will keep monitoring how the situation evolves. Our workforce and their unions have worked closely together to ensure that we manage fatigue and well-being, with longer than normal work rosters to manage in-country quarantine requirements. Our supply chain has responded well to ensure adequate stock levels of key reagents. The area that has been most difficult to manage is where we require specialist skills for planned and unplanned tasks, who were not able to travel to West Africa, in which case we appreciated their support via remote means, similar how -- similar to how many of us are currently working. Turning to Slide 27. I will start by taking you through our performance at Ity. You can see that production has remained flat in the past quarter, as higher throughput and recoveries compensated for the slight decrease in processed grade. Total tonnes mined increased predominantly due to being able to utilize the larger mining trucks, based both on the work done to improve roadways and other running surfaces and less train interruptions. Increased volumes of waste were mined for the tailings dam lift, which will be completed by the end of May. In terms of all-in sustaining cost, we have seen the decrease at Ity due to increased volumes of gold sold and lower unit mining and site G&A costs, which were partially offset by higher sustaining capital. In the coming quarters, ore production sources will vary, with Bakatouo dropping out in the second half of the year, due predominantly to the rainy season, while ore production from Daapleu will increase. This will be complemented with ore from the Colline Sud pit in the second half of the year with feed from historic stockpiles continuing to supplement plant feed. We also expect recovery rates to decrease as an increased proportion of Daapleu fresh ore is processed. On the exploration front, we expect to announce updated Le Plaque resources and reserves midyear, along with an updated Ity mine plan to incorporate the expanded Le Plaque resource base. We are well underway with the process to get the necessary permits and approvals for Le Plaque in the upcoming quarters.Moving on to Houndé, production remained flat as slightly higher than through -- as slightly higher throughput offset slightly lower recovery rates, while the process grade remains stable. The main focus continued to be bulk placed mining at each of our pits, which was given a boost with the arrival of the PC3000 excavator from [ Karma ], which immediately settled into high productivity mining at Vindaloo center. The addition of this machine and 3 of the larger [ trep dotes ] from Ity will enable the mine to achieve higher total mining volumes planned for 2020 compared to 2019 and enable us to open up the pits for increased oil production in the second half of the year. Process grades remain stable as we used stockpiles to supplement the mine feed during the quarter. All-in sustaining costs increased, as you can see here, although less than anticipated. This was mainly due to higher sustaining capital and unit processing costs, which was partially offset by lower unit mining and G&A costs. Looking ahead, all low-grade stockpiles are expected to continue to supplement new feed, while mining focuses on waste capitalization. For 2020 as a whole, Houndé is expected to finish the year strongly on the basis of commencing mining at Kari Pump as Bouéré production winds down. The permitting process is well underway, and our expectation is that this will be received in quarter 3 2020. Patrick will cover exploration in more detail in his section, though it is worth noting that an updated resource estimate is expected to be released midyear, along with maiden reserves for Kari West, which will be followed by the publication of an updated Houndé mine plan. Due to continued explorations and success around the Kari center area, a new mineralized zone was discovered, which was named rather imaginatively as Kari Gap. Consequently, an updated resource estimate will be announced midyear, with maiden reserves later in the year due to ongoing metallurgical and geotechnical analysis given its increased size. Turning to Slide 29. Here is a quick look at Agbaou, where production decreased in line with expectations, as mining neared completion in West Pit 5, requiring recommencement of ore production from the North pit and lower-grade ore from the South pit. Slightly lower plant recoveries were due to the fresh ore feed from North pit, although we did achieve higher throughput due to less influence in the blend from the slowing West Pit fireball. All-in sustaining cost increased due to lower gold sales, higher sustaining capital and higher mining unit costs due to recommencement of mining in the North pit, which was partially offset by lower processing and G&A unit costs. For the rest of the year, we expect to continue mining in the North and South pits, with contributions from the West pit [ stopping ] in the second half of the year. This means that throughput and recovery rates are expected to decrease in the second half of the year as greater volumes of harder fresh ore are processed. Slide 30 takes us to Karma, where production remained flat as the increase in grade stacked compensated for marginal decrease in stacked tonnage and recovery. Mining was concentrated on the Kao North pit, which provided the majority of the ore tonnes stacked for the quarter. But importantly, mining was started mid quarter at the GG1 pit to ensure sufficient feed over the course of the year. GG1 is located approximately 5 kilometers west of the Heap Leach facility, whereas Kao North is main -- is located 12 kilometer to the southwest. And consequently, the mining team did very well to split the fleet and maintain good production rates throughout the quarter. The higher grades at Kao North, the stack grade increased marginally. All-in sustaining costs increased, albeit outperforming guidance, mainly due to the increase in mining and G&A unit costs, along with increased royalties and sustaining capital. Looking at the rest of the year, we will continue mining at the Kao North pit and GG1. So with the commencement of the next phase of the Kao North pit, GG1 will make up a high proportion of the ore feed, which will see grades come down slightly. Before I hand over to Patrick for an exploration update, Slide 31 provides an overview of the status of work on our 2 stand-alone projects. Studies are underway with the aim of publishing a PEA on Fetekro, and PFS on Kalana later this year. At Fetekro, we have commenced -- completed early stage studies based on the current 1.2 million ounce resource to help form an internal view of the project. The exploration team is currently working on increasing the resource, which will be updated in the coming months and which will form the mining inventory for the pre-feasibility study. Once these studies are published on Fetekro and Kalana, we will be better positioned to decide which project we prioritize. In addition, we will also need to include the SEMAFO projects in our project assessment. This concludes my section. Patrick, over to you. Thank you.
Thanks, Mark, and hello to everyone on the call. So a quick update on our exploration efforts this quarter. Looking at Slide 31. You can see a snapshot of our exploration activity in Q1 2020. We saw a company-wide exploration spend of around $17 million this quarter, representing approximately 40% of the 2020 full year budget. As it was noticed by and said by Louis, it has been quite a record quarter of activity for us. And I would say that sometimes, unlike some of our competitors, we were even more active on the exploration front, while respecting strictly the COVID preventing processes. In total, the spend translated into over 108,000 meters being drilled across our assets, but mainly focused and to be more concentrated on Houndé, Ity and Fetekro. You can see here on the right, how is it spending this quarter has been split across our near-mine and greenfield exploration activity this quarter, basically 2/3 for brownfield, and 1/3 for greenfield and Fetekro.At Ity, all -- most of the drilling concentrated on the Le Plaque area as we continue to explore that area at depths and also extending the Le Plaque deposit towards the southwest in a new area that was not known before, while expanding a little bit Le Plaque Main and Le Plaque North. We have been also working on the Daapleu Southwest and target area, where we are delineating some positive results that we had a few years ago. Fetekro exploration focus remain on the Lafigué deposit. It has to be noticed that during the last quarter of 2019, drilling has been expanding. And today, we have expanded significantly the Lafigué deposit. We plan to drill for the first part of the year at least 60,000 meters, which only, I would say, 40% has been drilled at the end of the first quarter. We are working today with [ C3 ] on Fetekro. And as said before, we plan to announce [indiscernible] new increase resource level. Looking ahead to the rest of the year, we expect to see the result of our efforts, including the resource increases for the Kari area at Houndé. Again, in Kari, it will include some increased resource -- indicated resource in Kari West, in Kari Center, and new resource on the area named Kari Gap, which is separating Kari Center and Kari South. For the Le Plaque area at Ity also, then we increase the resource, and also at Fetekro. As you can see here and from Mark's slide also, it's going to be a very exciting first half of the year for Endeavour and the full year probably in the same way. It will be good for Endeavour to increase the resource base as we did previously. And on the exploration front, we are quite positive in term of the outcome. I look forward to updating to you on our progress next quarter. And now I hand out -- I hand you back to Sébastien now to wrap up the call.
Thank you very much, Louis, Mark and Patrick. Before we conclude, I wanted to touch on our combination with SEMAFO. As you know, we announced this combination in late March with the shareholder meetings scheduled on May 28. This transaction is something we are very excited about as together, we will create a leading West African producer. Not only this, but the merger will provide operational diversification across 6 mines, 4 of which will have combined production of over 800,000 ounce a year. On this slide, we have mapped out a snapshot of pro forma Q1 results for the 2 companies, demonstrating the strong pro forma metrics. The companies together produced 0.25 million ounce at very similar all-in sustaining cost below $900. As you see highlighted in the box, this generated nearly $190 million in operating cash flow. As we previously mentioned, the combined group will have a very healthy balance sheet, which when you include the upcoming La Mancha equity placement, representing 0.5x net debt to adjusted EBITDA ratio. This increased size and liquidity is important for us, and it means that we will be able to meet the investment hurdles for a number of larger funds that currently wants to invest in us. Moving to Slide 35. We have annualized the pro forma Q1 key metrics to give you a flavor of what the combined group might look like on a full year basis. The companies together can produce over 1 million ounce at below $900 per ounce, equating to approximately $750 million in operating cash flow, more by the way than B2Gold is forecasting. At this rate, our net debt-to-EBITDA would sit close to 0 by year-end. I believe that these are conservative numbers as both companies expect a strong second half of the year, on the end of the slide, thanks to higher grade at Kari Pump, and for SEMAFO, thanks to the restart of Boungou. This is one of many reasons why we are very excited about the outlook for the combined companies. Moving to Slide 36. You can see how this combination can translate into a tangible rerating potential for the group. This will place us with the top 15, within the top 15 gold producer globally, and also make us the largest gold producer in Côte d’Ivoire and Burkina Faso.Finally, before we wrap up the call, I'd like to show you the consensus 2020 free cash flow yield for the combined group, which sits at 12%. As you see here, if you annualize Q1, it currently stands at 16%. We believe that as we continue to deliver free cash flow, this should lead to a significant rerating. It is interesting to see that if we were to trade at the peer average of 6% yield, this would represent a share price appreciation of nearly 100%.To wrap up our presentation, and before we take questions, I'd like to take a brief look at the year ahead of our Endeavour and the key moments for us. As I mentioned at the start, the shareholder meetings are scheduled on 28th of May, and we urge you to vote. You might also have seen this morning that we received a notice from the Director of Investments under the Investment Canada Act, indicating that the Minister of Innovation, Science and Economic Development is considering whether to order a national security review of this transaction. This ties back to the Canadian government announcing enhanced review measures under the Investment Canada Act in response to COVID-19. As we do not have assets in Canada and we do not produce anything national security related, we don't expect that this will be an issue and expect to close this transaction sometime in June. There might have been a mistake with the TMAC transaction and Shandong investment.In terms of our exploration projects, we expect an updated Le Plaque resource estimate at Ity within Q2, with the reserve estimate following soon after midyear. At Houndé, an updated Kari area resource estimate is also expected in Q2, with the maiden reserve estimate for Kari West by mid-year. Finally, with Fetekro, an updated resource estimate is due in the middle of the year. We then hope to carry out a PEA in Q3.All in all, it's a very exciting year for Endeavour, and I'd like to thank the team for their incredibly hard work, both over the past few years to help us reach this strong financial position, and also over the last quarter, during which we had to grapple with the challenges of COVID-19. I'm incredibly proud of what we've achieved as a team, and I look forward to seeing what the rest of the year brings for us. And we now have some time to take your questions. Thank you very much.
[Operator Instructions] Your first question comes from the line of Ovais Habib, Scotiabank.
Congrats on a great quarter. Sébastien, I just had a couple of questions more related to COVID. And look, it was really great to hear that all your operations are running smoothly. Do you see any impacts to cost as you deploy and follow new COVID protocols and procedures?
No, at this stage, I mean we don't see impact on cost, whether on the supply chain or on our operations. I mean the cost is mainly the cost of responding to COVID-19 through the enhanced equipments that we've provided to our sites, but also to the donation that we've made to the host countries where we operate. And at this point, we have a total investment cost either for internal responses or for supporting the host countries of about $6 million.
Got it. And just on that -- and in terms of -- obviously, the government is also a little bit distracted with this whole COVID situation. Are you witnessing any delays in sort of receiving or even talking about permits with the government officials? I'm specifically talking about Le Plaque and Kari Pump areas. And it looks like everything seems to be running smoothly, and you guys are looking to at least start mining at Kari Pump by the end of this year.
Yes, we have -- I think that things are going pretty smoothly. And I think that's probably thanks to the strong relationship that we've been building progressively with our host countries. They want us -- they want to support us. They know that those operations are also important and key for them. And I must say that in both Côte d’Ivoire and Burkina Faso, we've done, despite the COVID-19 crisis and work at home principles and quarantines and so on, we've been working very efficiently and diligently with the 2 Ministry of Mines in Côte d’Ivoire and Burkina Faso, and we have made some extremely positive progress on both fronts. As an example, for Kari Pump, we have the commission of the government, which is scheduled for the end of May. And therefore, we are expecting to have probably even earlier than what we expected the Kari Pump permit, which means as early as end of Q2.
And your next question comes from the line of Chris Thompson, PI Financial.
Congratulations an absolutely stellar quarter. I think Ovais has answered -- or rather asked a number of the questions I was going to ask, but I have one remaining here. Just looking at Ity at the moment, the Daapleu, obviously, deposit here. What are you noticing as far as the metallurgical characteristics of the deposit? Are they in line with expectations? Obviously, this is going to be an important component, I guess, of the second half production.
Sure. Thanks, Chris. Mark, you want to give some color on that?
Yes, Chris, we run a number of different trials looking at the, I guess, it relates to the fresh ore and the [indiscernible] content. And we've done some trials on both low-grade and high grade. I guess encouragingly, when we put in the low-grade portion, we do see decent recovery sort of in the range of the mid 70%. Although conversely, when we put the high grading, we do see the lower recoveries which are indicated in the DFS. And what we're doing -- because we do recognize that, that is still quite a lot of gold going under the tailings then over the life of the deposit. So what we're doing is a number of tests, metallurgical tests, which are well underway. And we are considering some, what we can do with the flow sheets to try and recover some additional gold. So as of starting, at this point in time, it's sort of tracking with the DFS. So we do recognize the loss of gold to tailings.
Great. And just, Mark, just quickly, what sort of component percentage-wise of mill feed would the flow comprise?
For the year, it's probably sitting at about 30% of the mill feed, 25% to 30%.
And your next question comes from the line of Justin Chan, Numis Securities.
Congrats on a very strong quarter. My first question is a little bit related to a noncore op perhaps. Karma had a very good quarter and a good all-in sustained margin contribution. The gold price is now quite attractive and that asset, I believe, should have a fair amount of price optionality just given the volume of material. You made a fairly large write-down there. Is there any -- I guess, can you give us your latest thinking on how you look at that operation? How much does the gold price change things? And is this quarter an indication that things might be better there than you expected? Might we see some changes to that write-down perhaps reversing?
Thanks, Justin. Well, I think on Karma, we are -- and we tend to have always a cautious approach to all our assets. We've been running this asset in the $1,200, $1,300 gold price environment rather than a $1,700 plus gold price environment, which obviously, are changing the optional -- the option value of Karma going forward, including in the vicinity for additional resources, and including the potential for adding significant resources on the refractory side, which we never really looked at in the past, given the gold price environment. So we keep that option in the portfolio. We'll see going forward if this option is best used for us or best use for someone else. We don't have to rush. That's a good thing. And therefore, we're happy with the way have been changing over the last 12, 18 months.
I see. Another one is related to COVID, and just the situation in-country and the integration of the SEMAFO assets when that transaction presumably closes. Is the current state of affairs in-country such that you'd be able to quickly integrate operations and turn them into Endeavour operations? Is there much work to do from that perspective? And just from a security perspective, can you remind me what the status of the landing strips are at the SEMAFO assets and whether COVID or anything else is impacted on that time line?
Sure. Well, on the integrations, so we are actively working as a joint team on the integration, in particular pre closing. We've been very active, and we have numerous teams on all functions and operations going on in order to be as effective as possible from day 1 of the closing. The good thing is that both companies have strong teams in country, which means that despite COVID-19, there are a lot of things that can be done from day 1 from an operations standpoint. On the security front, our Head of Security has been actively working with the SEMAFO guys to review all the SEMAFO security protocols and prepare to put in place our own security protocols from the closing date. So this is progressing well also. On the -- I would say security in country. There has been some big progress already made in the North part of Burkina. You probably -- I mentioned several times that we were hoping that the fact that the French were repositioning the Burkina force, or the 3,500 French soldiers which are deployed in Mali that have been repositioned in the 3-border region in the North part of Burkina, we've seen some significant already progress on that front. They are not doing a lot of publicity on it, but we know on the ground that there has been some good progress made in the North. And I think that this will help going forward to prepare also some strong operation in the east part of the country, which is important for us for the restart of Boungou that we are still scheduling to be in Q4. There has been some good progress with SEMAFO on finalizing the -- awarding the contract mining to a third party. It has been a short list, and we hope that this will be done and finalized in June or July. So overall, I think we're in good shape. There's a very strong, again, coordination and communication on a daily basis between the SEMAFO teams and the Endeavour team in order to have a very smooth and effective transition by the closing date.
I see. And just -- sorry, on the airstrips at Mana and Boungou, are they completed now? And if not, what's the plan? Or what is the expected time line on that?
They are not completed yet, but Mana is the one that will be prepared and ready very shortly. While Boungou, the objective is to have it ready before we restart the mining at Boungou. So again, before beginning of Q4.
Okay. That's really helpful. And my last one is on Houndé, and the -- just the CapEx profile there, and perhaps for the group. I'm just -- just reading the text, it seems like some degree of CapEx was deferred. I guess can you give me a sense of your CapEx profile in Q2 and Q3? Is there any spillover from the first half into the second half at this point?
Overall, I think there are only, I would say, there's a few million dollars on Houndé that has been delayed compared to what we initially expected from Q1, and that will be spread between Q2 and Q3. But I'm not expecting a big impact on that. And again, the biggest point for us was to ensure that we get ready with Kari Pump and we were hoping that the COVID-19 environment would not delay the award of the Kari Pump mining permit. And so far, things have progressed very well. So hopefully, we should have this permit before end of Q2 or beginning of -- very early beginning of Q3.
I see. And so that -- and that will determine sort of a degree of pre-strip timing, is that fair to say?
Yes, exactly.
And your next question comes from the line of Richard Hatch, Berenberg.
Congrats on a solid quarter. First one is just on the cash flow statement. So Q1, you didn't see too much of a working cap build, if any at all. Is there anything going on there? And should we expect to see any kind of working capital build just in terms of stocks and inventories and such like into Q2?
Can I take that one, Seb?
Yes, Louis, do you want to go on?
Yes. I was expecting the question, Richard. Thanks for that. What I did flag at the full year results when you asked me the question was that receivables that's -- we are going into an election year in Burkina Faso and getting that recovered might be challenging. And I think that's the one change we've seen since the end of the year. So they've introduced a new process for certification. COVID has had an impact on them in terms of getting officials to the office. So there has been a buildup there on VAT receivables. In terms of inventories at the moment, we have seen a reduction in consumables. Do not expect a big change at this point in time over the second quarter. We've also drawn down on inventories, as Mark has picked up in his operations report, and finished goods. So I don't think at this stage, we anticipate major changes, say, for VAT receivables potentially at this stage.
And then the other thing I would say, Richard, is on the working cap. And particular on consumable, we're starting to see, in fact, the impact of the policies that we started 12, 18 months ago and renegotiating all the contracts at the group level for Endeavour. And in particular, moving on stock consignment with a lot of our key suppliers and therefore, reducing progressively our own inventories.
Okay. Cool. So you just held them in a centralized hub within country rather than on your own balance sheet?
Yes, exactly. And they hold the stock for us on site, and we pay as we take them rather than having to pay for the stock.
Okay. Cool. It's good business. A question on Fetekro. Patrick, if you were to close your eyes and dream on Lafigué, what do you think that you could take that resource to?
Don't tell to all your tricks, Patrick. I don't know if Patrick is still on the line.
Yes, I'm here. Yes, Well, I cannot answer to that. The fact is, all what I can say that since we announced the 1.2 million ounce indicated, it has been going quite well for us. We have been expanding significantly at Fetekro towards south, in both -- in all area, in the center, in the north, and also in the central part. So it's a bit difficult for me to answer this question. We are very happy with the results we have today. We still have, let's say, 30% of the drilling results to be received and to be integrated. I don't know, but I think the increase is going to be significant compared to the 1.2 million ounces we announced last year. And again, Fetekro will not be -- Lafigué will not be closed even after we publish this resource. There is still material potential and potential updates probably. So sorry not to answer or to give any number, but we are very happy with this deposit that is becoming nicer and nicer.
That's all right. It's a bit of a cheeky question. And then last two. First one, just on Kari Center and the Gap. Sorry, just to be clear, is there anything we should be reading into that in terms of you having to do additional work on the network and the geotech work? Or is that just simply, as you alluded to in the release, just down to its size?
If I may go on, just -- yes, if you remember, Kari Center was not very large deposit. We had only 140,000 ounces. On top of that, the grade was lower than Kari West, and indeed Kari Pump. What we have been working on is to closing the gap, so the name of Kari Gap between Kari Center and the Kari South area. It's not going to be huge, but it's going to be significant because we expect the grade to be in between Kari West and Kari Pump. So it's significant. And due to this, we are running right now geotech and met test on this area. So that's why we are going to book only reserve on Kari West, which is much more advanced and later on with the year on the reserve on the Kari Center or Kari Gap and a little bit Kari South, what we will be able to book.
Okay. I'm sorry, my last one is just on Ity. Just on those fees that you had to pay in the quarter based on the original kind of increase in your interest. Just with the exploration work you're doing there, should we expect to see any more cash flow going out in terms of that?
Not sure, Richard, which fee you're referring to?
I think -- it -- was it, look, a $5 million fee in cash flow statement with regards to Ity.
Additional 5%.
Is it Le Plaque? Yes, that was probably for Le Plaque. This was the -- how do you call it, the earnout on the acquisition of the last 20% interest in Ity. Where we agreed that any further discoveries, we would pay about $1 per indicated ounces that we discover. So it's not big amount.
And your next question comes from the line of Fahad Tariq from Crédit Suisse.
I noticed there wasn't much discussion on Kalana, even though a pre-feasibility is expected in the second half of the year. Can you talk a little bit about how that fits into the kind of priorities? It sounds like Fetekro is a bit more of a priority. Is that fair? Or any color on that would be helpful.
Yes. Well, no. It's not that in terms of priority, it's downgraded. It's more that current strategy is '20 and '21 to be completely focused on cash flow generation. And therefore, we not expect to launch any new project before the end of '21, beginning of '20. And therefore, what we want is to have as much optionality as possible in the portfolio in being able to figure out by end of '21, which one from a return perspective is the most attractive between the different projects that we will have in the portfolio by that time. So Kalana is pretty well advanced, and we are expecting the updated PFS in September. And therefore, there's been more focus right now on Fetekro in order for Fetekro to come as quickly as possible at par in terms of development at Kalana, so that we can really take, I would say, a proper decision on one or the other by the end of '21.
Okay. Great. That's really helpful. And my only other question was just switching gears on security in Burkina Faso. Have there been any more discussions with the government potentially providing security support, particularly now that you'll -- once the deal closes, you'll become the largest gold miner in the country. Any updates there?
Well, we have a very, I would say, very open and frequent dialogue with the authorities in Burkina Faso, in particular around security. I think we have a very strong relationship with them. And hopefully, you'll be able to see those through the -- when we'll be announcing the restart of Boungou and all the security plans that goes with Boungou, which I think will demonstrate that we've made some very good progress around Boungou in that particular area. On the rest of the assets that we currently operate or the other assets of SEMAFO, again, they are all in regions and parts of Burkina Faso, where there is no real, I would say, challenge from a security perspective. And therefore, there hasn't been any particular updates, except the fact that we've been progressively increasing and reviewing whenever it's required with our own team.
We will now take our final question, and the question comes from the line of Geordie Mark, Haywood Securities.
Just quickly then and transitioning, I guess, from operations [ and uninsured ] to the holistic viewpoint on the company going forward. Given the augmented sort of asset portfolio base that you're likely to get, I guess, from June, can you give us an idea on the holistic sort of approach to milestones? And investment sort of thresholds that you'd be looking at in terms of managing those assets going forward in terms of what could be called noncore, what you would look at in terms of maturing along a development pipeline, et cetera? And what you see as being a manageable number of assets across Africa?
Thanks, Geordie. Well, we -- I think we presented at the end of -- as part of our year-end results for '19 that our target is to bring progressively the overall portfolio of Endeavour to close and closer to 20% return on capital employed. In order to reach that, when you look at -- on a per asset basis, obviously, there are some assets which are far away from that number, in particular, Karma. So we will continue to review, as we've done in the past, in terms of portfolio optimization in order to ensure that we keep and focus our management team on assets that are really generating the level of returns that we are expecting for the company and for our shareholders. So obviously, Karma is clearly under scrutiny.In terms of overall number of assets, I always said that between 5 to 8 assets is something which is manageable, in particular, if those assets are all into the same, I would say, region. And this is why we've been really focusing as much as we can in continuing to grow in West Africa rather than having to go outside West Africa, because from a pure operational standpoint, it obviously ease a lot our management structure and ability to manage more assets into the same region.
I will now hand back over to you, sir, for closing remarks.
Thank you very much, operator. Thank you all for attending our Q1 results. Hope you keep all safe in this COVID-19 crisis. And looking forward to speaking again to all of you for our Q2 results at the end of July. Thank you very much, and have a lovely day.
Thank you. That does conclude our conference for today. Thank you for participating. You may all disconnect.